“They’ve done studies, you know. 60% of the time, it works every time.” -Brian Fantana (a.k.a. Paul Rudd) in Anchor Man
The big rally to start in 2023 is a welcome change from what we saw last year, but the extreme nature of the rally could be a significant clue that higher prices could be in the cards.
Walter Deemer (retired institutional market analyst) noted a “Breakaway Momentum” (BAM) thrust took place last week. This rare event happens after the total 10-day NYSE advancers to decliners is higher than 1.97. In other words, very strong market breadth over ten days. A day or two of strong breadth is normal, but to see it persist for ten days is a clue that something is happening, and we should pay close attention. Market breadth is simply how many stocks are going up versus down, suggesting a good deal of buying is happening underneath the surface.
According to Walter, there have been 24 of these events since 1949, and the S&P 500 was up a year later 23 times and up 20.7% on average. The only time it didn’t work was a year after a signal in January 1987.
With help from our friends at Ned Davis Research, I looked at the data and took things further. The recent total 10-day NYSE advance to decline came in at 2.16, so I looked at all the times it was above 2.10 versus the 1.97 that Walter used. In other words, even stronger breadth.
Doing this showed 14 previous instances (the one last week was number 15). Once again, the future returns appear solid, higher a year later 13 times but up six months later every single time. I’ll say that again, six months later, stocks have never been lower after this signal and were historically up nearly 16%. That would be a first-half rally that virtually no one is expecting.
Here’s a breakdown of all the previous buying thrusts, again only the year after the January 1987 signal was in the red. Up more than 20% on average, a higher 94.9% of the time a year later, is something the bulls shouldn’t ignore here.
This is just one bullet point, and as the great field reporter Brian Fantana told us, studies with high success percentages might sound good in theory, but they don’t always work out.
The good news is that we’ve seen many other examples lately that suggest a change in trend has occurred, and the potential for higher prices could be coming. As I noted in “What Happens When Everyone Agrees That Stocks Will Fall?,” most investors expect a rough first half of 2023 and better second half. This is another clue that the masses could be wrong (just as they’ve been throughout history), and a surprise early 2023 rally could be firmly in the cards.
Lastly, we will release Outlook 2023: The Edge of Normal this week, and we are so excited. So be on the lookout for it, and I hope you enjoy it!